Key points of investment
Incident: In 2023, the company achieved revenue of 4.915 billion yuan, yoy +3.78%, net profit to mother of 1,258 million yuan, yoy +9.15%, net profit of 660 million yuan after deducting non-return to mother net profit of 660 million yuan, yoy -42.86%. Among them, 2023Q4 achieved revenue of 1,234 billion yuan, yoy -7.73%, qoq -1.74%, net profit to mother of 930 million yuan, yoy +154.02%, 2023Q3 of -30 million yuan, net profit of 385 million yuan after non-return to mother, yoy +37.84%, and 2023Q3 of -37 million yuan. The performance was in line with our expectations.
The operating performance continued to be steady, and the investment business contributed considerable returns. The company's operating business continued to perform steadily in 2023, including 1) overseas information distribution and metaverse platform Opera achieved revenue of US$397 million, yoy +19.87%, net profit of US$169 million, yoy +1026.83%, net profit of US$64 million, yoy +326.28%; 2) Skywork AI achieved deduction of non-net profit of 321 million yuan, yoy +23.78% (data before business restructuring and adjustment, that is, overseas music social networking); 3) Leisure Entertainment in the domestic chess and card business Achieved net profit of 185 million yuan, YOY -46.84%, continuing the contraction trend; 4) Global game R&D business profit contributed to our expected stability. In addition, the company's investment business performance was excellent. In 2023, the company's net investment income was 255 million yuan, and the net income from changes in fair value was 1,283 million yuan, of which 659 million yuan was mainly income from changes in the fair value of financial assets held by Opera and included in non-recurring income. (Note: No special statement, the unit of currency is RMB)
Build a talent team and invest heavily in AI. In 2023, the company's sales, management, and R&D expenses rates were 32.95%, 17.52%, 19.69%, yoy-0.12pct, 4.26pct, and 5.11pct, respectively. Management expenses increased 37.08% year over year to 861 million yuan, mainly due to increased equity incentives and 40.16% year-on-year to 968 million yuan. The main reason was that the company firmly promoted the All in AI strategy, formed a talent team, and corresponding employee costs, technical service fees and server discounts increased by the end of 2023 The number of R&D personnel in the company reached 1,508, an increase of 19.12% over the 1,266 at the end of 2022. At the same time, the R&D team had more than 300 people with master's degree or above. Furthermore, the company announced a draft restricted stock incentive in March 2024. In order to motivate AI core technicians, it plans to grant 62.46 million restricted shares (about 5.1% of the total share capital) to incentive recipients. Assuming they are granted in April 2024, the incentive cost is expected to reach 1.3 billion, which will be amortized in 2024-2027.
Diversified AI business matrices continue to be implemented, and we are optimistic about the company's AI leadership. The company has built multiple matrices such as AI big models, AI search, AI music, AI video, AI social networking, and AI games. 1) The AI big model “Tiangong” was iterated to version 3.0 on 2024/4/17, and is currently one of the open source MoE models with the largest model parameters and the strongest performance in the world; 2) The AI search function continues to improve, covering the needs of various fields such as search, creation, and entertainment; 3) The AI music model “Tiangong SkyMusic” was released on 2024/4/17; 4) AI social networking products Linky has been launched overseas; 5) The AI game “Club Koala” began testing on 2024/4/18. In addition, the company is also actively developing AI videos, AI comics, etc., and looks forward to continued breakthroughs and implementation of the company's AI models and applications.
Profit forecast and investment rating: We will maintain 2024-2025 and add a 2026 EPS of 0.70/0.82/0.88 yuan, corresponding to the current PE price of 56/48/44X, respectively. The company's forward-looking layout is AI. We are optimistic that the company's leading edge will continue to be highlighted, and that diversified layouts will continue to be implemented to open up room for growth and maintain a “buy” rating.
Risk warning: AI models and applications fall short of expectations, operational business falls short of expectations, industry regulatory risks